What can wavelets unveil about the vulnerabilities of monetary integration? A tale of Eurozone stock markets

• Published in: Economic modelling Vol. 52; pp. 981 - 996
• Main Authors: Dewandaru, Ginanjar, Masih, Rumi, Masih, A. Mansur M.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.01.2016; Elsevier Science Ltd
• Subjects: Causality; Co-movement; Contagion; Economic crisis; European Monetary Union; Eurozone; Eurozone stock markets; Financial crisis; Interdependence; Securities markets; Shock transmission; Sovereign debt; Stock exchanges; Studies; Volatility; Wavelet analysis; Wavelet coherency; Wavelet transforms; United States > US; Europe; Shock transmission; Contagion; Wavelet analysis; Interdependence; Wavelet coherency; Co-movement; Causality; Eurozone stock markets; Financial crisis
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2015.10.037

The study has two main objectives: (i) to investigate whether there is pure contagion or fundamental-based contagion/interdependence among the Eurozone equity markets (Germany, France, Italy, Spain and Netherlands), attributable to the shocks stemming from nine major crises around the world (ii) to investigate the evolution of market integration, whether mainly short-run or long-run. Wavelet decompositions, in both its discrete and continuous forms, are employed to unveil the multi-horizon nature of co-movements, volatility and lead–lag relationships. This is to unveil the path of linkages and the behavior underlying the transmission mechanism of financial shocks across major Eurozone stock markets. Evidence also supports the presence of common shocks whereby equity markets in Eurozone are significantly affected by episodic crisis events globally. Prior to the recent subprime crisis, contagion effects have generated short-term shocks that may potentially involve, among other factors, excessive channels. In stark contrast, the most recent US subprime crisis and EMU sovereign debt crisis reveal the evidence of fundamental-based contagion. We also find the increasing short-run and long-run stock market integration, driven by several stages of the establishment of EMU. Policy implications for regulators and investors are discussed in the context of continued monetary integration. •Investigate the nature of contagion among Eurozone equity markets due to exogenous shocks•Wavelet decomposition in discrete and continuous form is used•Prior to subprime crisis, contagion effects generated mainly short term shocks•The US and Eurozone crises reveal fundamental-based contagion•Increasing integration driven by several stages of the establishment of EMU